Key Takeaways
- • Ray Dalio, founder of Bridgewater Associates, warned on Thursday that US and global equities face mounting pressure from rising bond yields, as the earnings-driven cushion that has protected stocks is narrowing.
- • Dalio told CNBC that stocks have so far weathered the global bond sell-off because earnings growth kept expected equity returns attractive relative to bonds, but that advantage is diminishing.
- • Dalio cautioned that free cash flows could deteriorate even as headline earnings look healthy, a risk he says investors may be overlooking.
- • Dalio said credit spreads are starting to widen, a sign of tightening financial conditions, as he described the market as later in the cycle.
- • U.S. Treasury yields are hovering near multi-decade highs amid large government deficits, persistent inflation and AI-related borrowing.
Summary
Billionaire investor Ray Dalio warned on Thursday that stocks face growing pressure from rising bond yields, even as corporate earnings continue to grow. Speaking to CNBC's Sri Jegarajah at the Milken Institute Asia Summit in Singapore, the Bridgewater Associates founder said equities have so far absorbed the global bond sell-off because earnings growth has kept expected stock returns attractive relative to bonds. According to Dalio, that advantage is now narrowing.
"We're in the part of the cycle where interest rates can rise without sending the equity market down because there's enough earnings growth and there's enough expected return," Dalio said. "But when that cushion comes down, then you're coming later into that cycle. So that's where we are." He added that the decline in the cushion, driven by higher bond yields and higher stock prices, is already showing up in credit markets, with spreads beginning to widen.
The warning comes as U.S. Treasury yields hover near multi-decade highs. Investors are weighing large government deficits, persistent inflation and rising borrowing tied to artificial intelligence investment. Dalio noted that equities entered the current cycle offering significantly higher expected returns than bonds, which helped sustain demand for stocks even as borrowing costs rose.
Dalio also cautioned that investors may be overlooking the risk of deteriorating corporate cash generation. Even as headline earnings improve, free cash flows could weaken, leaving equities more exposed as financial conditions tighten. Coverage from other outlets on the same remarks, including a separate report describing the bond bear market as having further to run, reinforces the view that the buffer protecting stocks is thinning.
"We're in the part of the cycle where interest rates can rise without sending the equity market down because there's enough earnings growth and there's enough expected return," Dalio said. "But when that cushion comes down, then you're coming later into that cycle. So that's where we are." He added that the decline in the cushion, driven by higher bond yields and higher stock prices, is already showing up in credit markets, with spreads beginning to widen.
The warning comes as U.S. Treasury yields hover near multi-decade highs. Investors are weighing large government deficits, persistent inflation and rising borrowing tied to artificial intelligence investment. Dalio noted that equities entered the current cycle offering significantly higher expected returns than bonds, which helped sustain demand for stocks even as borrowing costs rose.
Dalio also cautioned that investors may be overlooking the risk of deteriorating corporate cash generation. Even as headline earnings improve, free cash flows could weaken, leaving equities more exposed as financial conditions tighten. Coverage from other outlets on the same remarks, including a separate report describing the bond bear market as having further to run, reinforces the view that the buffer protecting stocks is thinning.
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